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Market Update

Schwab clients get the latest in-depth U.S. market news as well as analysis and commentary from respected sources, both proprietary and third party.


Posted: 5/23/2017 4:15 PM ET

Winning Streak Perseveres

U.S. equities added to their recent run, notching four-straight sessions in the green, but disappointing domestic housing and manufacturing reports, as well as some somberness over a deadly terrorist attack in the U.K., kept the gains in check. Treasury yields were higher and the U.S. dollar gained ground, while gold fell and crude oil prices ticked modestly higher. On the earnings front, Toll Brothers and Agilent Technologies topped forecasts.

The Dow Jones Industrial Average (DJIA) increased 43 points (0.2%) to 20,938, the S&P 500 Index added 4 points (0.2%) to 2,398, and the Nasdaq Composite gained 5 points (0.1%) to 6,139. In moderate volume, 767 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil moved $0.34 higher to $51.47 per barrel and wholesale gasoline was unchanged at $1.66 per gallon. Elsewhere, the Bloomberg gold spot price decreased $8.54 to $1,252.09 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 97.36.

Toll Brothers Inc. (TOL $38) reported fiscal Q2 earnings-per-share (EPS) of $0.73, above the $0.62 FactSet estimate, as revenues rose 22.0% year-over-year (y/y) to $1.4 billion, topping the forecasted $1.3 billion. The luxury homebuilder's deliveries of homes in Q2 were up 26.0% y/y, exceeding expectations, and the company raised its full-year outlook for deliveries. The company noted that it saw the best spring selling season in over ten years, as solid and improving demand and the financial strength of its affluent buyer base is driving growth. Shares were higher.

Agilent Technologies Inc. (A $59) posted fiscal Q2 profits of $0.50 per share, or $0.58 ex-items, versus the forecasted $0.48, as revenues rose 8.0% y/y to $1.1 billion, roughly in line with projections. The bio-analytical and electronic measurement solutions company issued Q3 guidance that was a bit shy of estimates, though it raised its full-year outlook. Shares of Agilent Technologies finished nicely higher.

New home sales fall, business activity data mixed

New home sales (chart) fell 11.4% month-over-month (m/m) in April to an annual rate of 569,000, well below forecasts of 610,000 units, and compared to the upwardly revised 642,000 unit pace in March, which was the strongest pace in almost a decade. The median home price was down 3.8% y/y at $309,200. New home inventory rose to 5.7 months of supply at the current sales pace. Sales were down m/m in all regions. Y/Y, sales were higher in the Midwest and South, though lower in Northeast and West. New home sales are based on contract signings instead of closings.

Tomorrow, we will get a broader look at home buying activity in the form of existing home sales, with contract closings expected to decline 1.1% to an annual rate of 5.65 million units from March's fastest pace since February 2007 (economic calendar). However, the highlight of tomorrow's docket will likely be the release of the minutes from the Federal Open Market Committee's (FOMC) May monetary policy meeting. A June rate hike is highly expected though details of the discussion are likely to be scrutinized for clues to any changes in the outlook for further hikes this year. Also, the debate regarding plans to shrink the Fed's robust balance sheet is also poised to garner attention as it could have implications on whether this could impact the frequency of rate increases. MBA Mortgage Applications are also scheduled to be released.

Schwab’s Chief Investment Strategist Liz Ann Sonders points out in her video, June Rate-Hike Highly Likely?, on the Insights & Ideas page at www.schwab.com, with Vice President of Trading and Derivatives, Randy Frederick, that shrinking the Fed balance sheet is a form of policy tightening and we are probably going to hear a lot more about a transition from quantitative easing (QE) to quantitative tightening (QT). Liz Ann addresses the question of why shrink the balance sheet now in her latest article, Gimme Three Steps … and a Stumble?, noting that allowing the balance sheet to shrink gives ammunition back to ease policy when the next recession occurs. But the Fed is navigating uncharted waters in trying to shrink such a gargantuan balance sheet; which is why the process is likely to be very gradual, but also why periods of market volatility could ensue. Read more on the Markets & Economy page at www.schwab.com and follow Liz Ann and Randy on Twitter: @lizannsonders and @randyafrederick.

The preliminary Markit U.S. Manufacturing PMI Index came in at 52.5 for May, below April's final read of 52.8, and compared to estimates calling for an improved level of 53.0. However, the preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector this month accelerated to 54.0 from April's reading of 53.1, versus forecasts of an improvement to 53.3. Readings above 50 for both reports denote expansion in activity.

The Richmond Fed Manufacturing Activity Index dropped to 1 in May from 20 in April, clinging to expansion territory (a reading above zero), and versus expectations of a 15 reading.

Treasuries were lower, as the yield on the 2-year note rose by 2 basis points (bps) to 1.30%, while the yield on the 10-year note added 3 bps to 2.29%, and the 30-year bond rate gained 4 bps to 2.95%. For analysis of the bond markets, see our article, Mixed Signals: What Does Recent Economic Data Mean for Bonds?, on the Insights & Ideas page at www.schwab.com, where you can also find Schwab's Vice President of Trading and Derivatives, Randy Frederick's and Chief Fixed Income Strategist, Kathy Jones' video, Fed Rate-Hike Cycle: How Can Bond Investors Prepare? Follow Randy, Kathy and Schwab on Twitter: @randyafrederick, @kathyjones and @schwabresearch.

Europe mostly higher, Asia mixed, U.K. terrorist attack eyed 

European equities finished mostly higher, following some upbeat economic data, while the markets appeared relatively calm in the face of a deadly terrorist attack in the U.K. Markit's preliminary Composite PMI Index—a gauge of business activity in both the manufacturing and services sectors—remained at the fastest pace of expansion in more than six years for this month, while German business confidence for this month rose to the highest level since 1991. Additionally, Germany's Q1 GDP growth was unrevised at a 0.6% quarter-over-quarter pace of expansion, matching estimates, and up from the 0.4% growth seen in Q4. French business and manufacturing confidence both improved in May, while Switzerland's exports declined last month. Crude oil prices took a breather from a recent rally that came amid heightened optimism regarding extended production cuts. Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, notes in his latest Schwab Sector Views: Is Energy an Opportunity or a Trap, world economic growth has improved, according to Markit’s PMI surveys, which have largely moved into positive territory around the world. That should help to bolster demand. But the correlation between economic growth and growth in oil demand may be changing, as other sources of energy are becoming more viable, and we are maintaining our neutral outlook for the energy sector. Read more on the Markets & Economy page at www.schwab.com. The euro and British pound declined versus the U.S. dollar despite the data, while bond yields in the region were mixed.

Stocks in Asia finished mixed as the markets grappled with the extended rebound in the U.S. yesterday, along with festering U.S. political uncertainty and as geopolitical concerns lingered following the weekend's North Korean missile test, a terrorist attack in the U.K., and Indian Army military raids. Securities in Japan declined, with the yen gaining some ground on the news of the U.K. terrorist attack, while a report showed the nation's manufacturing growth slowed in May. Australian equities fell, as basic materials retreated modestly from a recent run, while Indian listings came under pressure, as the nation's Army said it launched military raids into a Pakistan-controlled part of Kashmir to destroy camps hosting terrorists, per Bloomberg. Markets in South Korea, on the other hand, advanced, as did those traded in Hong Kong, while mainland Chinese stocks were lower. Amid the backdrop of political and geopolitical uncertainty, see Schwab's Jeffrey Kleintop's, CFA, article, Missiles and Markets: An investor guide to geopolitical risks on the Markets & Economy page at www.schwab.com, as well as Jeff's and Randy Frederick's video, Political Risk: How Should Investors Respond?, on the Insights & Ideas page at www.schwab.com.

Tomorrow's international economic calendar will be fairly light, with reports slated for release to include Japan's Leading Index, PPI from Spain, and consumer confidence from Germany.

Schwab Center for Financial Research - Market Analysis Group

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